Mandatory Pooling and Unitization in Ohio, Part I: History and Constitutionality

Landowners, in certain situations, can be compelled by the state to combine their mineral interest with their neighbors for the purpose of producing oil and gas. In Part I of a multi-part series, I explain the history and constitutionality of this practice.

What is Compelled Participation?

“Compelled participation” is the term I will use throughout this blog series to refer collectively to mandatory pooling and unitization. Mandatory pooling and unitization are variations of similar state action — forcing mineral owners to include their mineral interests with other owners in a pool or unit. In later posts the two concepts will be distinguished and discussed separately, but because they have the same legal and historical origins, it also makes sense to discuss them collectively. Admittedly, this term is imperfect, but is preferable to untangling the Gordian knot of terminology in this area of oil and gas law (see our earlier blog discussing these confusing terms).

Compelled participation occurs when an operator cannot negotiate an agreement (usually in the form of an oil and gas lease) with enough landowners to legally or efficiently develop oil and gas resources. In those situations the operator can apply for an order from a state agency forcing the recalcitrant landowners to nevertheless participate.

Compelled participation occurs primarily in two situations. The first situation is “mandatory pooling,” which is done to create a drilling unit. A drilling unit is a tract of land that complies with state minimum acreage and spacing requirements for an individual well. The second situation is “unitization,” which is done to create a larger area of land for the purpose of maximizing productivity of a certain geological formation (often an underground reservoir of oil). Both situations are designed to protect each owners’ correlative rights in the minerals.

I will explain in my next post how and when compelled participation can happen in Ohio. But before that, it is important to understand how Ohio and other states decided that this practice was necessary. First, let’s look at the legal background.

The Legal Background: Property Rights

Three property rights intersect to create the need for compelled participation. The first right is the “rule of capture,” a legal principle imported from English law that wild resources are the property of the first person to capture them. The rule came into existence over a hunting dispute, but it applies today to oil and gas because, like wild animals, oil and gas move around the earth without regard for arbitrary property boundaries imposed by law. Oil is therefore considered a “wild” resource that belongs to the first person to extract it, subject to limitations created by the doctrine of “correlative rights.”

The doctrine of correlative rights is a descendant of the rule of capture and it is the primary legal doctrine that regulates a property owner’s right to produce oil and gas in Ohio. Correlative rights are enjoyed by landowners having access to a common natural resource whose supply shifts across boundaries, such as gas or oil. The doctrine establishes the right of each landowner to have a “reasonable opportunity” to capture the resource under his or her property, in a share equal to the size of their land in proportion to the size of the underlying geological formation. Correlative rights recognizes that the “wild” nature of oil and gas makes it appropriate for owners of property containing a common pool of oil and gas to have somewhat interrelated property rights.

Third is the right to property. Property rights are bedrock in America, protected in multiple places in the Constitution. However, the right to own and develop property is not absolute and those rights must bend to the common good. Eminent domain, taxation, zoning, and various health and safety laws modify private property rights in favor of a greater public concern. An unregulated right to drill for oil and gas has sometimes created neighborhoods that look like this:

Historical Background: Balancing Interests

The picture above is from the Spindletop oil field, outside of Beaumont, Texas, where the discovery of oil in 1901 sparked the first Texas oil boom. Because the nascent industry had little to no regulation, speculators and oilmen (including an Ohioan, W. Scott Heywood) rushed to sink their own wells, creating a forest of oil derricks.

Spindletop was not only ugly, it was also inefficient. The sheer density of wells stifled the productivity of the underground oil reservoir. Oil, like other natural resources, is capable of being overproduced, and it was a serious problem in the early days of the oil industry. Each well depends on natural pressure from the underground reservoir pushing the oil upwards, and every additional well reduces that pressure.

In response, states began imposing spacing requirements, described as “conservation laws” to prevent overproduction. Spacing requirements mandate that each well have a certain minimum number of acres to itself and that each well be a minimum distance from other wells and property boundaries. After the Ohio equivalent to Spindletop in Morrow County in the 1960s, Ohio adopted its conservation law. Ohio spacing requirements came into effect in 1965 and are now codified at R.C. 1509.24 and O.A.C. 150:9-1-104. For wells producing oil or gas from at least 4,000 feet below the surface (which includes all existing horizontal shale wells in Ohio), the well cannot be drilled on a tract less than 40 acres (a drilling unit, described earlier), must be 1,000 feet from any other well, and must be 500 feet from the boundary of the tract.

But while minimum spacing requirements achieved great results for conservation and efficiency, they created a new problem. Landowners wanting to drill might be unable to form a drilling unit if their neighbors objected and there was insufficient space for the well without the neighbor’s consent. This pitted consenting and nonconsenting landowners against each other, while also threatening the public interest in developing the state’s oil and gas resources. Fortunately, the correlative rights doctrine provided the state with legal authority to impose a solution: compelled participation.

Compelled participation reconciles the competing interests of consenting landowners, nonconsenting landowners and the public. Nonconsenting landowners who refuse to lease or otherwise join a unit can be compelled to join the unit so that they cannot stand in the way of the efficient production of oil and gas from a reservoir. Then, the costs, expenses and revenues of that well are divided among the landowners within the unit and the operator of the well. Under this method, everyone gets their fair share of the revenue, all property owners’ rights to enjoy the common natural resource are preserved, and the oil and gas is produced efficiently.

In Brief: Is Compelled Participation Constitutional?

Compelling landowners to dispose of a property interest against their will naturally invokes questions of constitutionality. Mandatory pooling statutes have long been held constitutional as necessary to balance the competing interests discussed above. Municipal mandatory pooling statutes have been upheld citing the Supreme Court’s ruling in Village of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926). Statewide mandatory pooling statutes have been upheld according to the Supreme Court’s ruling in Ohio Oil Co. v. Indiana, 177 U.S. 190 (1899).

In Ohio Oil Co., the Supreme Court of the United States invoked the doctrine of correlative rights to uphold statewide bans on wasting oil and gas. The Court held that “[a]s to gas and oil, the surface proprietors within the gas field all have the right to reduce to possession the gas and oil beneath.” Id. at 209. Given such precedent, statewide mandatory pooling statutes have consistently been held constitutional as necessary to achieve the best outcome for consenting mineral rights owners, nonconsenting owners and the public at large.

NEXT: Mandatory Pooling and Unitization in Ohio, Part II: Explaining the Statutes

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